Net IRR vs Gross IRR
Gross IRR is return before fees and expenses; net IRR is return after all fees, carry, and fund-level costs.
Allocator relevance: Allocators earn net returns—gross performance is meaningless if fees and carry absorb the edge.
Expanded Definition
Gross IRR reflects the underlying investment engine; net IRR reflects what LPs actually receive. The gap between them is driven by management fees, fund expenses, fee offsets, carry structure, and timing. In some strategies, this spread is modest; in others, it can be large enough to change the investment decision.
Allocators compare net IRR across managers because it captures both investment skill and economic fairness.
How It Works in Practice
Managers report both gross and net performance. Allocators validate that fee and carry calculations align with fund documents and check whether net IRR is consistent with TVPI/DPI and realistic valuation marks.
Decision Authority and Governance
Governance relies on LPA clarity, audit quality, and consistent reporting methodology. LPAC oversight may come into play where valuation and fee allocation judgments affect net outcomes.
Common Misconceptions
- Gross IRR is “real” and net IRR is secondary.
- Fee offsets automatically keep net/gross spreads small.
- Net IRR comparisons are clean across all strategies (they still need context).
Key Takeaways
- Net is what LPs take home—optimize for net.
- The net/gross spread is a diligence signal.
- Pair IRR with DPI/TVPI for full picture.